Soft loan terms on offer to start-ups

HIGH interest rates have been blamed for holding back business start-ups. But there is an alternative for new businesses looking for cheaper funding - soft loans.

Common features of soft loans are low interest rates and deferred repayments. They may be made on an unsecured basis and tied to a specific geographical area.

Midland Bank is often involved on a partnership basis with another organisation.

'We acknowledge the fact that some businesses struggle to get going through traditional financial sources,' said Neil Harle, manager of Midland Enterprises.

For example, he said, a business might be viable, but the owner may have only a small cash stake, or there might be a lack of security. Because of this, a loan guarantee scheme may not be appropriate.

The loans are soft, he said, not in the sense of being easy to obtain but in their terms.

Typically, loans are at base rate or lower, compared with a commercial loan of 3 or 4 per cent four per cent above over base rate. The cheapest loans are not available to businesses able to borrow elsewhere.

'Applicants have to prove that they tried to get finance from a high-street bank and failed, and this will be evident to the panel,' Mr Harle said.

The availability of soft loans is partly a recognition by the agencies assisting new businesses that advice and hand- holding are not enough.

Douglas Russell is investment manager of Northumberland Tec, which has just launched a series of loan and investment funds to assist local businesses. He believes that setting up local finance deals is a vital element of the Tec's work.

'It is part of economic development, the only way to do it,' he said.

Northumberland Tec's funds are split between loans and equity investment. The pounds 5m Oak Fund is for share purchases in new businesses; the Rowan Fund, jointly financed with Midland Bank, lends sums of between pounds 1,000 and pounds 20,000 to new businesses, unsecured and at half base rates; and the Cedar Fund, backed by British Coal, provides loans for training at a 9 per cent fixed rate.

Although the Northumberland funds are among the first to be organised by a Tec, they are in many ways typical of the soft loans available.

The Directory of Soft Loan Schemes Available for Small Businesses in England lists 63 schemes currently on offer, most designed for new businesses.

The directory, compiled by Martina Klett of Kingston University, is part of a research project sponsored by Midland Bank into the effectiveness of cheap loans in generating economic activity. It is due to be completed next year.